Marijuana board rejects rule aimed at lease agreements

An array of cannabis products are seen at Dankorage in Anchorage. In a 3-2 vote, the Marijuana Control Board rejected changes to regulations that would have required landlords who receive a part of the business revenue in lieu of rent to submit to the same licensing examination as the tenant operator. (Photo/Naomi Klouda/AJOC)

A measure that would have prohibited marijuana businesses from making agreements with their landlords to pay part of their revenue as rent was rejected by the Marijuana Control Board on Nov. 27 after a surge of public protests.

The board voted 3-2 against the proposed new regulation. Chairman Peter Mlynarik and board member Loren Jones voted to change the law, which would have required landlords to pass criminal background checks and be named on the business license if they accepted profits in exchange for rent.

The vote was a major victory for people who testified overwhelmingly in favor of the way the current regulation is written. Of the hundreds of licenses granted so far in Alaska for cannabis business operations, Alcohol and Marijuana Control Office Executive Director Erika McConnell had estimated that as many as a third or more involved this kind of lease arrangement.

Kelly Wilmes, a managing partner in TOPROK LLC, told the board that many landlords and building owners had already relied on the rule as it is written when they invested money and formed business relationships.

“Our group has personally invested$250,000 and (it) would create a financial hardship as we would be forced to repay the funds from our personal pockets with no reimbursement from our original investment,” she wrote to the board.

The investment firm manager said destabilizing the foundations of current businesses would make it hard for them to survive.

Two investment partners, Todd Zietlow and John Scott Young, wrote of the “tough decision” they made to partner with the owners of a marijuana business during the current downturn in the Alaska economy. If any change were made, they advocated “grandfathering” in provisions for percentage-based leases already approved.

McConnell pointed out that licensees and applicants who use percentage-based leases could move to graduated leases and thereby achieve a similar effect “without involving the landlord in a financial interest in the business.”

But the bottom line according to submitted public testimony is that raising capital from banks isn’t an option.

Brandon Emmett, who holds a seat representing the marijuana industry on the board, said if the new regulation went into effect, he could foresee landlords opting out of their arrangements, which would cause a big financial shake-up to the new industry.

“Many of these landowners or landlords are people who had empty space they just wanted to fill in the down-turned economy,” Emmett said. “They didn’t really have much thought about the industry and many were approached by operators. I could see them saying ‘no, not really that interested in getting further involved,’” if the new regulation required them to be on the license.

Though he voted against it, Jones said he understood why people felt keeping the regulation in place is important.

“I understood the feeling was that by removing the percentage lease allowance, it took away potential capital funding for startups. This wasn’t unheard of in the real estate world for a lot of different kinds of startups,” Jones said.

The underlying concerns behind the recommended change was that too many unnamed and unknown investors could leave the door open for a criminal element to enter the legal Alaska cannabis industry.

“There will be other issues that come up on the topic of financial interest. Most of us were just looking for a background check so we could know whether a person was going a little too far,” Jones said.

Extended meeting

The board met four days in November, divided between two, two-day Anchorage meetings in order to get through about 50 applications and four complicated violation hearings.

This was a larger batch of applicants than other meetings and required twice the meetings in order to “not hold up the applicants,” Chair Mlynarik had said when the board voted to add a special two-day meeting in Anchorage after getting through just 22 of 50 applications from Nov. 14-15.

“We’ve had so many doggone license applications that we just couldn’t get through them all,” said board member Mark Springer of Bethel, who holds a seat representing rural Alaska on the board. “Some of these applications require more attention then others. What really can take a while is when we do a manufacturer, looking at and approving each individual product they are going to make. Some submit photos and ingredients for 30 or 40 products.”

These range from lollypops to cookies to specialty drinks containing cannabis.

On Nov. 28, one applicant out of Soldotna, Fire Eater Sideshow Food LLC, submitted 90 products intended to be manufactured for retailers.

The company will need to return to the board at its Jan. 24-26 meeting in Juneau after completing the application with more details.

Emmett said other reasons also meant the board put in double duty this time.

“We’ve had quite a few license applications, but also the board has evolved and we are asking more questions after a number of applications were tabled or denied,” Emmett said.

If the applicants are better vetted at the meetings, the burden is lessened on the Marijuana Control Office staff and alleviates problems later on, he said.

The board also passed regulation that allows licensed cultivators and product manufacturers to provide employees small samples for the purpose of quality control testing.

It also requires that the amount taken from the inventory in the form of samples must be documented and retained by the licensee, as must documentation from the employee on a specific form required by the board.

Another new regulation requires that all cannabis business owners report to director McConnell if any employee or other person steals money or marijuana or marijuana products from the operation. It adds this level in addition to any police reports that are made.

Springer said the idea behind this regulation is to allow the board to keep tabs on crimes that may be occurring in or to businesses “for their protection.” It also embodies the board’s enforcement role and accountability to the public for what happens at cannabis operations.

Another regulation requires reporting to McConnell when testing equipment at labs fail. There are only two marijuana testing labs in operation in Alaska, Steep Hill Alaska and CannTest LLC, both in Anchorage.

The labs test for potency in marijuana samples, microbes, solvents and terpenes, or the oils that give cannabis plants diversity.

The definition of an Alaska resident regulation will go out for public comment, as will questions on who sets the standard for odor emissions. Current regulations for license applications have the same residency standard as for the Permanent Fund Dividend, which is one calendar year of living in the state.

The board is also looking at charging an operator if multiple inspections are required due to not being prepared for the scheduled inspection. More meeting documents can be found at commerce.alaska.gov/web/amco. For a complete list of items, when they are prepared to go out for public comment, go to https://www.commerce.alaska.gov/web/amco/MarijuanaRegulations/MarijuanaR...